Monzon vs. Spouses Relova

A trial court cannot impose the effects of default—such as allowing the ex parte presentation of evidence and rendering judgment without receiving the defendant's evidence—when the defendant has filed an answer and has not been declared in default, because failure to appear at a hearing is not a ground for default. Furthermore, Section 4, Rule 68 of the Rules of Court does not apply to extrajudicial foreclosures, and junior encumbrancers cannot claim the residue of an extrajudicial sale under its provisions.

Petitioner Teresita Monzon obtained loans from the spouses Perez and the spouses Relova, securing them with mortgages over portions of her property. She subsequently executed deeds of absolute and conditional sale over the mortgaged portions in favor of the respondents. Coastal Lending Corporation extrajudicially foreclosed the entire property due to Monzon's separate debt, and Addio Properties, Inc. won the bid, leaving a residue held by the Clerk of Court. Respondents filed a Petition for Injunction to claim the residue under Section 4, Rule 68.

• Loan Obligations and Security: On December 28, 1998, Monzon executed a promissory note for P600,000 in favor of the spouses Perez, secured by a mortgage over Lot No. 2A, and subsequently a Deed of Absolute Sale over the same lot. On March 29, 1999, she executed another promissory note for P200,000 in favor of the spouses Relova, secured by a mortgage over Lot No. 2B, and later a Deed of Conditional Sale over that lot.
• Extrajudicial Foreclosure: On October 23, 1999, Coastal Lending Corporation extrajudicially foreclosed the entire 9,967-square meter property (including Lots 2A and 2B) due to Monzon's separate indebtedness. Addio Properties, Inc. won the bid, leaving a residue of P1,602,393.65 in the custody of the Clerk of Court.
• Petition for Injunction: Respondents filed a Petition for Injunction to compel the Clerk of Court to deliver the residue to them under Section 4, Rule 68, and to declare Monzon liable for their respective loan amounts.
• Ex Parte Proceedings: During the trial, Monzon and her counsel failed to appear at a hearing despite due notice. The RTC granted an oral motion allowing the ex parte presentation of evidence by respondents before the Clerk of Court, and subsequently rendered judgment in favor of respondents without receiving Monzon's evidence.

• Due Process Violation: Petitioner argued that the RTC violated her right to due process by rendering judgment after respondents' ex parte evidence without declaring her in default or giving her the opportunity to present her own evidence.
• Novation by Dacion en Pago: Petitioner maintained that the mortgage obligations were novated by the deeds of sale, extinguishing her obligations to respondents.
• Improper Claim to Residue: Petitioner contended that respondents could not claim the residue from the Clerk of Court without a writ of preliminary attachment or garnishment under the Rules of Court.

• Entitlement to Residue: Respondents argued that as junior encumbrancers, they were entitled to the residue of the foreclosure sale pursuant to Section 4, Rule 68 of the Rules of Court.
• Waiver of Due Process: Respondents countered that petitioner was not denied due process because she was given ample opportunity to be heard but showed tepid interest in pursuing the case.

• Default and Due Process: Whether the trial court erred in applying the effects of default and allowing the ex parte presentation of evidence without a valid default order.
• Applicability of Rule 68: Whether respondents have a cause of action to claim the residue of an extrajudicial foreclosure sale under Section 4, Rule 68 of the Rules of Court.

• Default and Due Process: The trial court erred in applying the effects of default. Failure to appear at a hearing is not a ground for default; only failure to file a responsive pleading, failure to appear at pre-trial, or refusal to comply with discovery modes justify default. A defendant who has filed an answer retains the right to present evidence on scheduled dates for the defense, even if they waived the right to cross-examine the plaintiff's witnesses by absenting themselves from the plaintiff's hearings.
• Applicability of Rule 68: Respondents have no cause of action against the Clerk of Court under Section 4, Rule 68. Rule 68 governs judicial foreclosure sales, whereas the present case involves an extrajudicial foreclosure under Act No. 3135. Unlike Rule 68, Act No. 3135 does not grant junior encumbrancers the right to receive the residue; it only grants them a right of redemption.

• Grounds for Default — The effects of default are followed only in three instances: (1) actual default for failure to file a responsive pleading; (2) failure to appear at a pre-trial conference; and (3) refusal to comply with modes of discovery under Section 3(c), Rule 29. Mere non-appearance at an ordinary hearing does not constitute default when an answer has been filed.
• Disposition of Proceeds in Extrajudicial Foreclosure — In extrajudicial foreclosure sales governed by Act No. 3135, junior encumbrancers are not entitled to receive the balance of the purchase price; their remedy is the right of redemption under Section 6 of Act No. 3135. Section 4, Rule 68, which grants such a right to the residue, applies exclusively to judicial foreclosures.

• "Mere non-appearance of defendants at an ordinary hearing and to adduce evidence does not constitute default, when they have already filed their answer to the complaint within the reglementary period. It is error to default a defendant after the answer had already been filed."
• "Unlike Rule 68, which governs judicial foreclosure sales, neither Act No. 3135 as amended, nor A.M. No. 99-10-05-0 grants to junior encumbrancers the right to receive the balance of the purchase price."

• Philippine National Bank v. De Leon, G.R. No. 62370 (1990) — Cited to admonish precipitate orders of default and to emphasize that default orders are frowned upon, as they deny litigants the chance to be heard.
• Supena v. Dela Rosa, 334 Phil. 671 (1997) — Followed to distinguish the three types of sales under Philippine jurisdiction: ordinary execution sale (Rule 39), judicial foreclosure sale (Rule 68), and extrajudicial foreclosure sale (Act No. 3135).
• Katon v. Palanca, Jr., G.R. No. 151149 (2004) — Applied to justify the dismissal of the case against the Clerk of Court motu proprio on the ground of failure to state a cause of action, even if the case was elevated on different grounds.

• Section 3, Rule 9, Rules of Court — Defines default and its effects. The Court clarified that the trial court erroneously applied this provision when petitioner had already filed her answer.
• Section 4, Rule 68, Rules of Court — Governs the disposition of proceeds in judicial foreclosure sales, granting junior encumbrancers the right to the residue. Held inapplicable to extrajudicial foreclosures.
• Section 6, Act No. 3135, as amended by Act No. 4118 — Governs redemption in extrajudicial foreclosures and grants a right of redemption, but not a right to the residue, to junior encumbrancers.
• Article 2126, Civil Code — Provides that a mortgage directly subjects the property to the fulfillment of the obligation, whoever the possessor may be. Cited in relation to the rights of first mortgagors against subsequent possessors.

Ynares-Santiago, Austria-Martinez, Nachura, and Reyes.